The Cassidy Law Firm Blog

In recent years the number of bankruptcy petitions filed in the United States has reached historic levels. On primary reason for the increase in the number of debtors turning to bankruptcy is the national recession the country has been experiencing. As is often the case during an economic downturn, the real estate market has also suffered. In many markets, property values plummeted virtually overnight. The result for many debtors is that they now owe considerably more for their house than the property is worth in the current market. The one shining star in all of this is that if you find yourself in this situation and you have a second mortgage on the property you could be able to eliminate the second mortgage through bankruptcy.

Chapter 13 Bankruptcy in Middletown

Referred to as “stripping” a second mortgage, a debtor who files a chapter 13 bankruptcy in Middletown may qualify to eliminate the second mortgage entirely if the debtor owes more on the first mortgage than the home is currently worth. Under these circumstances the second mortgage becomes an unsecured debt because there is not enough value in the property to secure the debt.

To illustrate:

Assume that you purchased your home in 2000 for $450,000. In 2004 your home was appraised at $600,000 so you took out a second mortgage for $50,000 to help cover the costs of your child’s first year in college. When the housing market crashed a few years ago the value of your home plummeted and the property is now worth about $400,000 in the current market. You currently owe about $410,000 on the first mortgage and $40,000 on the second mortgage. You owe more on the first mortgage than the home is worth in the current market so you would be a good candidate to eliminate the second mortgage through bankruptcy.

In a chapter 13 bankruptcy a debtor is allowed to keep most assets because the debtor is required to develop a repayment plan that contemplates the repayment of most debts. Priority debts, such as some taxes or child support, must be paid in full during the repayment plan. Next are secured debts. Secured debts are brought current and continue to be paid during the repayment period. Unsecured debts may receive something during the plan period but remaining unsecured debts can be discharged, or eliminated, after the successful completion of the repayment plan. If your second mortgage is now an unsecured debt it may be discharged, or eliminated, meaning you will not need to repay it. Consult an experienced New Jersey bankruptcy attorney about your specific situation.